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Experts Explore Links Between Education, Economic Well-Being

By Beth Baker
October 26, 2009


In today's recessionary times, college students may wonder if their high-priced education will pay off. The answer is yes, according to a wealth of research going back many decades. Education boosts both personal earnings and the national economy. The educational benefit also increases over time, with the earnings gap between those with less education and those with a college degree growing wider.

"Education confers a lot of benefits," says economist James J. Heckman, Henry Schultz Distinguished Service Professor at University of Chicago. "It promotes health and productivity. It reduces crime. It engages people in the wider society, and it opens up options for all of us -- not only for the individual, but society has more options for [educated] people. You can train them better, and they can adapt to the changing economy."

Although most economists agree that education packs a powerful economic punch, they disagree on what contributes to the payoff. Is it the years of schooling that count? The quality of your education? How well you do on test scores? Your parents' educational background?

Researcher Eric Hanushek found that cognitive skills count for more than number of years in school.  "Once you think about it, it doesn't surprise you that if you go to school and don't learn anything, it doesn't count for much," he says.

The simplest and most common way to measure the economic impact of education is to look at earnings and educational attainment - meaning how many years of schooling did individuals complete and do they have a degree to show for it. In recent years, some economists have turned their attention to educational achievement, focusing on what people actually learned in school, rather than the "sheepskin effect" of having a diploma. "It's a much more difficult question and much more interesting," says John Ralph, program director for data development for the National Center for Education Statistics. "But there's a lack of good data."  

Attainment and Earnings

Most government reports use educational attainment as their measure. A 2002 report (the most recent available), "The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings" (PDF), by the U.S. Census Bureau estimated that over a 40-year full-time work life, individuals with a bachelor's degree would earn on average a cumulative total of $2.1 million, more than double what a high school dropout would earn.

The report also found that the earnings gap was growing. In 1975 employees with an advanced degree earned 1.8 times the earnings of a high school graduate. By 1999 that number was 2.6 times.

Moreover, experience pays off more for highly educated people. Their average earnings continue to rise over their work-lives while those with a high school diploma or some college tended to have flat earnings. High school dropouts actually saw their earnings fall from 1975 to 1999.

Even after accounting for the cost of tuition and the foregone income from not working while enrolled in school, education is a good deal.

An annual report by the Organization of Economic Cooperation and Development, "Education at a Glance 2009" found that after taking into account the direct and indirect costs of acquiring a college education, there is still a strong economic benefit. This study found that in the U.S., the individual cost of acquiring higher education (known internationally as "tertiary education") was more than $90,000 in 2005. At the same time, the U.S. was among those nations that "continue to experience high rewards for obtaining higher education."

Those rewards did not diminish with age. In most countries, including the U.S., workers age 55 to 64 who had a college education earned relatively more than the working population as a whole. Both employment opportunities and earnings increased for older individuals with higher education.

Lifetime earnings are just one way to measure the economic benefit of education. "The Condition of Education, 2009," an annual NCES report, looks at educational attainment and annual earnings for young adults in the U.S. Median earnings (meaning half the group made more than this amount and half made less) for people between age 25 and 34 was $56,000 for those with a master's degree or higher, $45,000 with a bachelor's degree, $35,000 with an associate's degree, $29,000 for a high school diploma or equivalent and $23,000 for those who did not complete high school.

NCES also found that men continue to outpace women with comparable educational attainment. "In 2007, at every educational level, young adult males had higher median earnings than young adult females," the report notes. For those with a bachelor's degree, for example, young men earned $50,000 compared to $40,000 for young women.

Weekly earnings show an even greater divide based on education. Using 2008 figures for people age 25 and over, the Bureau of Labor Statistics found that median weekly earnings for those with a Ph.D. were $1,555 compared to $591 for those with a high school diploma. Another benefit of education is higher rates of employment. Unemployment for people without a high school diploma was 9.0 percent in 2008, compared to 2.8 percent for those with a bachelor's degree.

The earnings figures of those with a high school diploma are deceptive, though, says Heckman of the University of Chicago. Gathering accurate data on something as seemingly simple as high school graduation rates turns out to be complicated. "Depending on the data sources, definitions and methods used, the U.S. [high school] graduation rate is claimed to be anywhere from 66 to 88 percent in recent years--a wide range for such a basic educational statistic," notes Heckman and Paul A. LaFontaine in their 2007 paper "The American High School Graduation Rate: Trends and Levels" (PDF).

A major reason for this confusion is that many sources, including many government agencies, lump together those who receive a General Educational Development certificate (GED) with those who completed high school. As a result earnings of high school graduates appear to be lower than they would be if these two groups were listed separately. "The difference [in earnings] between a high school graduate and a dropout is bigger than the statistics show," Heckman said in an interview.

At all levels of education, completion is important. "While people might think some college would be helpful, it turns out it doesn't really make that much difference," says Emerson J. Elliott, director, special projects for the National Council for Accreditation of Teacher Education and former U.S. Commissioner of Education Statistics. "It's having the degree." (Elliott also serves on the State of the USA Editorial Committee.)

Achievement: Quality More Than Quantity

Another line of research looks at the economic benefits of educational achievement or cognitive skills, as measured by test scores. "When we talk about cognitive skills, we typically do not equate it to school per se," says Eric Hanushek, senior fellow at the Hoover Institution at Stanford University. In addition to classroom experience, he says, parental education, health, peer group and neighborhood all influence achievement.

In his research, Hanushek found that cognitive skills count for more than number of years in school. "Once you think about it, it doesn't surprise you that if you go to school and don't learn anything, it doesn't count for much," he says. "It's common sense."

Hanushek analyzed international math and science assessments conducted by OECD, along with data from the U.S. National Assessment of Educational Progress, and found that the quality of education, more than the quantity, affects individual earnings and national economic growth. For example, he points to studies in the U.S. that show higher math scores at the end of high school translate into higher annual earnings. "People with higher achievement go to good colleges and are more likely to complete college," he says. "And people with higher achievement, everything else being equal, earn more. An average level of achievement versus a good level of achievement is equal to maybe 15 percent per year in added income."

In a study published by the World Bank in 2007, "Education Quality and Economic Growth" (PDF), Hanushek and Ludger Woessmann also found that nations that tested higher on educational achievement had faster-growing economies. "Our commonsense understanding of the importance of good schools can thus be documented quite precisely," they noted. "A highly skilled work force can raise economic growth by about two-thirds of a percentage point every year."

Measuring educational or cognitive achievement, though, is difficult and controversial. Achievement is measured in any number of ways, from state proficiency exams to national and international assessments, college boards and armed forces entrance exams. "Even tests that purport to measure the same content can come up with different results," says John Q. Easton, director of the Institute of Education Sciences at the U.S. Department of Education. "There are few agreed on definitions of what a good test should look like."

In addition, Heckman and other experts point to factors that researchers often overlook when using test scores to measure educational achievement. "Social and emotional skills turn out to be very important," he says. "We have excellent measurements of this. Non-cognitive traits play a very big role in explaining wages, educational attainment and earnings in a lot of different dimensions."

Regardless of how it's measured, the value of education is likely to keep growing, both for individuals and the national economy. According to the Bureau of Labor Statistics' employment outlook (PDF) from 2006 to 2016, "Occupations that required a bachelor's degree or higher for an entry-level position will generally grow faster than the average for all occupations."

An increasingly global and technological economy also demands a more educated workforce. "We have a new openness in international trade," says Heckman. "You're getting a very big expansion of a whole set of opportunities. Educated people can make the most of those opportunities. That is a huge advantage in a modern economy."

Beth Baker is a long-time freelance journalist whose work has appeared in dozens of magazines and newspapers, including the Washington Post, Washingtonian, Ms., Preservation, Ebony, and Nature Conservancy. She has written extensively on medical research and aging issues for the AARP Bulletin. Her nonfiction book on alternative nursing homes, Old Age in a New Age, was published in May, 2007, by Vanderbilt University Press.

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